Ratio of Debt-to-Income
The debt to income ratio is a tool lenders use to calculate how much money can be used for a monthly mortgage payment after all your other monthly debt obligations are fulfilled.
How to figure the qualifying ratio
Typically, underwriting for conventional mortgage loans requires a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
For these ratios, the first number is the percentage of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including hazard insurance, HOA dues, Private Mortgage Insurance - everything that makes up the full payment.
The second number is the maximum percentage of your gross monthly income which can be spent on housing costs and recurring debt. Recurring debt includes vehicle payments, child support and monthly credit card payments.
Examples:
28/36 (Conventional)
- Gross monthly income of $3,500 x .28 = $980 can be applied to housing
- Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
- Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers with your own financial data, we offer a Loan Qualification Calculator.
Guidelines Only
Don't forget these are just guidelines. We will be happy to help you pre-qualify to help you determine how much you can afford.
AmeriBest Mortgage can answer questions about these ratios and many others. Give us a call at 3217777277.